Weekly Market Update

07/01/2019

Last year was a volatile year and 2019 appears to be no different. Investors have grown increasingly worried over a broad global growth slowdown, after a string of weak data. China’s private-sector index of manufacturing activity indicated contraction for the first time in 19 months, while, the US ISM Manufacturing index release for December was much weaker than expected. However, last week markets were bolstered by a combination of activity from Chinese authorities, an upbeat tone from the US Federal Reserve and increased confidence that a solution could be found to Donald Trump’s trade war, with talks set to resume this week.

To help boost China’s economy their central bank agreed to cut the required reserve ratio for banks by 0.5 per cent on 15 January and a further 0.5 per cent on 25 January. Authorities were also actively trying to encourage lending to small businesses as a further sign to help improve domestic conditions.

US Federal Reserve chair Jay Powell offered his upbeat assessment of US economic prospects following a strong jobs report last Friday, easing those fears of a 2019 downturn. A patient approach to potentially higher interest rates was enough to contribute to a strong rally in markets. Powell’s reassurance countered fears about the impact of US-China trade tensions and waning corporate profits. Investors believe there is no chance the Fed will lift rates in 2019, and a greater than 50 per cent chance of the US central bank actually easing policy this year. Confidence remains low!

The Democrats took over the US House of Representatives last Thursday, which will allow them to disrupt President Trump’s economic agenda and potentially release his tax returns. Talks to end the shutdown of the US government were paused with no signs of movement on either side.

As we start 2019, one would expect the major drivers of global equity markets to be the ongoing reduction in liquidity, slower earnings growth and rising volatility. The US Federal Reserve is continuing to raise interest rates and beginning quantitative tightening by reducing its bond holdings, an approach which is being replicated around the world. Earnings growth will slow as the US tax reform benefit passes through. Overall, the expectation is for flatter returns this year, accompanied by higher volatility. This will create opportunities for those investors who can actively navigate the more challenging environment

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